UPDATE 3-Sprint to buy Virgin Mobile USA

NEW YORK, July 28 (Reuters) - Sprint Nextel Corp (S.N) said
on Tuesday it would buy out Virgin Mobile USA Inc VM.N in a
deal that values the small wireless carrier at $483 million and
pushes Sprint deeper into the low-end prepaid mobile market.

Sprint, which already owns 13.1 percent of Virgin Mobile,
will pay a mix of shares and cash to buy the rest of the
company from Richard Branson's Virgin Group [VA.UL], South
Korea's SK Telecom (017670.KS) and public shareholders.

The No. 3 U.S. mobile service also plans to retire all of
Virgin Mobile USA's debt, estimated to be no more than $205
million by Sept. 30.

Virgin Mobile USA shares jumped 23 percent or $1 to $5.21,
close to the $5.50 per share that Sprint is paying in shares to
public shareholders.

The price is a 31 percent premium over Virgin Mobile's
closing price of $4.21 on Monday, though Sprint said the share
swap ratio was subject to a collar of 1.0630 to 1.3668 Sprint
shares per Virgin share.

While Sprint already rents space on its network to Virgin
Mobile, some analysts were puzzled by its decision to buy the
small carrier. Sprint already has its own prepaid unit, Boost,
which offers consumers unlimited calls for a set monthly fee.

The deal will make Sprint more exposed to the toughest part
of the prepaid market, in which customers pay in advance for
calls on a per minute basis.

Analysts said the deal could be an indication that Sprint
was having a difficult time turning around its main postpaid
business, which serves high-value customers who pay monthly
bills. Sprint is set to report quarterly results on Wednesday.

"I think Sprint is looking to delve deeper into prepaid
possibly because the postpaid segment remains extremely
challenged," said Soleil Nelson Alpha Research analyst Michael
Nelson. "It could be indicative of how tough things are in the
postpaid side."

Boost, Leap Wireless LEAP.O and MetroPCS PCS.N have
seen strong growth in prepaid services that offer unlimited
calls for a monthly fee.

Sprint, which has been struggling to stem customer
defections from its own mobile service over the last few years,
said the deal would increase its free cash flow but did not
give a specific forecast for the impact of the transaction.

"Sprint will continue to be challenged, as Virgin Mobile
has been in the last few quarters, to retain their
pay-per-minute subscribers," said Nelson.

TWO BRANDS

Sprint said it would manage Boost and Virgin as separate,
complementary prepaid brands in one group led by Virgin Mobile
CEO Dan Schulman, who will report to Sprint CEO Dan Hesse.

Sean Dalton, a partner at venture capital firm Highland
Capital Partners and a board member of Sprint technology
supplier Starent Networks Corp (STAR.O) said that once Sprint
owns all of Virgin it should try to improve the profitability
of that business by selling Virgin customers data services.

"Somewhere in the math of the deal there's a confidence
they'll be able to upgrade some of Virgin's customers to the
higher-value-added data services," Dalton said.

Otherwise it would not make sense for Sprint to increase
its presence in the prepaid market, which Dalton described as a
"marginal but not too interesting growth market."

"Who's to say there isn't an interesting prepaid data
market down the road?" he said.

Another analyst, John Hodulik of UBS, described the deal as
a "small positive for Sprint" and added that it helps
rationalize the hugely competitive U.S. prepaid market.

"We believe this is good news for MetroPCS and Leap,"
Hodulik said in a research note.

MetroPCS shares were up 4 percent on New York Stock
Exchange while Leap wireless shares rose 2.45 percent in
afternoon trade on Nasdaq.

The deal follows the Virgin Group's strategy of exiting
more mature wireless markets but keeping a brand presence.

Earlier in July, Virgin sold its 50 percent stake in Virgin
Mobile Canada to Bell Canada.

Sprint said the share exchange ratio for the Virgin Group,
which own 28.3 percent of Virgin Mobile USA, will be 93.09
percent of the exchange ratio for public stockholders, or about
$5.12 per share, including convertible preferred shares.

After the deal closes, Sprint will pay $12.7 million to
license the Virgin Mobile USA brand from the Virgin Group
through the end of 2021. It will have the option to renew the
licensing agreement until 2047.

Sprint will also pay Virgin another $50 million for net
operating losses available to be used in future for tax
purposes.

The share exchange ratio for SK Telecom, which owns 15.3
percent of Virgin Mobile USA, will be 89.84 percent of the
exchange ratio for public stockholders, or $4.94 per Virgin
Mobile USA share, Sprint said.

Sprint said it expected the deal to close in the fourth
quarter of 2009 or in early 2010.

Virgin Mobile shares jumped 22.8 percent to $5.17 in
morning trading on New York Stock Exchange, where Sprint shares
were down 1.54 percent at $4.48.
(Reporting by Sinead Carew and Tiffany Wu; Editing by John
Wallace, Ted Kerr, Gary Hill)